City of Falcon Heights Ramsey County, Minnesota. Communications Letter. December 31, 2016

Transcription

1 Ramsey County, Minnesota Communications Letter December 31, 2016

2 Table of Contents Report on Matters Identified as a Result of the Audit of the Financial Statements 1 Significant Deficiency 3 Required Communication 5 8

3 Report on Matters Identified as a Result of the Audit of the Financial Statements Honorable Mayor, Members of the City Council and Management Sack Thongvanh, City Administrator Roland Olson, Finance Director Falcon Heights, Minnesota In planning and performing our audit of the financial statements of the governmental activities, the business-type activities, each major fund, and the aggregate remaining fund information of the, Minnesota, as of and for the year ended December 31, 2016, in accordance with auditing standards generally accepted in the United States of America, we considered the City's internal control over financial reporting (internal control) as a basis for designing audit procedures that are appropriate in the circumstances for the purpose of expressing our opinions on financial statements, but not for the purpose of expressing an opinion on the effectiveness of the City's internal control. Accordingly, we do not express an opinion on the effectiveness of the City's internal control. Our consideration of internal control was for the limited purpose described in the preceding paragraph and was not designed to identify all deficiencies in internal control that might be material weaknesses or significant deficiencies and, therefore, material weaknesses or significant deficiencies may exist that were not identified. In addition, because of inherent limitations in internal control, including the possibility of management override of controls, misstatements due to error, or fraud may occur and not be detected by such controls. However, as discussed below, we identified a certain deficiency in internal control that we consider to be a significant deficiency. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies in internal control, such that there is a reasonable possibility that a material misstatement of the City's financial statements will not be prevented, or detected and corrected, on a timely basis. We did not identify any deficiencies in internal control that we consider to be material weaknesses. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. The significant deficiency identified is stated within this letter. BerganKDV, Ltd. bergankdv.com 1

4 The accompanying memorandum also includes financial analysis provided as a basis for discussion. The matters discussed herein were considered by us during our audit and they do not modify the opinion expressed in our Independent Auditor's Report dated April 13, 2017, on such statements. This communication is intended solely for the information and use of management, the City Council, and others within the City and state oversight agencies and is not intended to be, and should not be, used by anyone other than these specified parties. Minneapolis, Minnesota April 13,

5 Significant Deficiency LACK OF SEGREGATION OF ACCOUNTING DUTIES The City continued to evaluate and improve the segregation of accounting duties among City staff during Because of a limited number of office personnel, some areas of internal control still remain without proper segregation of accounting duties; however, we can report on the following processes. The lack of adequate segregation of accounting duties could adversely affect the City's ability to initiate, record, process, and report financial data consistent with the assertions of management in the financial statements. Revenue Cycle The four areas of segregation in the revenue cycle include mailroom custody, treasurer custody, accounts receivable, and accounting. We noted some overlap in the mailroom and treasurer custody, with one employee having job responsibilities in both areas. We also noted overlapping duties between accounts receivable and accounting, in that the person responsible for accounts receivable also is responsible for bank reconciliations. Purchasing Cycle The five areas of segregation in the purchasing cycle include purchasing authorization, receiving authorization, accounts payable, treasurer responsibilities, and accounting. We noted proper segregation between the responsibility of purchasing goods and services, the individual responsible for preparing the purchase order and the person responsible for approving the purchase order. However, we noted overlapping duties with the approval of purchase orders, input of invoices, and preparing of disbursements being performed by one individual. Payroll Cycle The five areas of segregation in the payroll cycle include human resources authorization, immediate supervisor authorization, payroll recording, paymaster custody, and accounting. In addition to having responsibilities in payroll recording, paymaster custody, and accounting cycles noted above, the Finance Director has full general ledger access and the ability to write and post journal entries. While we believe this access is necessary to efficiently perform the financial duties required, this access has the ability to override many of the controls and segregation listed above. 3

6 Significant Deficiency LACK OF SEGREGATION OF ACCOUNTING DUTIES (CONTINUED) Journal Entries The three areas of segregation in journal entries include an employee to write the journal entry, another to post the entry, and finally another employee to review the entry. We noted some journal entries were not approved by someone other than the person writing the entry. We recommend a second review/approval to ensure accuracy. Bank Reconciliation Process The two areas of segregation include an employee to prepare the cash reconciliation and another employee to review the reconciliation; ideally, the individual preparing the reconciliation has limited involvement in the revenue and purchasing cycles. We noted the bank reconciliations were not approved or reviewed by another person. We recommend each reconciliation be reviewed to help ensure accuracy. 4

7 Required Communication We have audited the financial statements of the governmental activities, business-type activities, each major fund and the aggregate remaining fund information of the City as of and for the year ended December 31, Professional standards require that we provide you with the following information related to our audit. OUR RESPONSIBILITY UNDER AUDITING STANDARDS GENERALLY ACCEPTED IN THE UNITED STATES OF AMERICA AND GOVERNMENT AUDITING STANDARDS As stated in our engagement letter, our responsibility, as described by professional standards, is to express opinions about whether the financial statements prepared by management with your oversight are fairly presented, in all material respects, in conformity with accounting principles generally accepted in the United States of America. Our audit of the financial statements does not relieve you or management of your responsibilities. As part of our audit, we considered the internal control of the City. Such considerations were solely for the purpose of determining our audit procedures and not to provide any assurance concerning such internal control. As part of obtaining reasonable assurance about whether the financial statements are free of material misstatement, we performed tests of the City's compliance with certain provisions of laws, regulations, contracts, and grants. However, the objective of our tests was not to provide an opinion on compliance with such provisions. PLANNED SCOPE AND TIMING OF THE AUDIT An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements; therefore, our audit involved judgment about the number of transactions to be examined and the areas to be tested. Our audit included obtaining an understanding of the City and its environment, including internal control, sufficient to assess the risks of material misstatement of the financial statements and to design the nature, timing and extent of further audit procedures. Material misstatements may result from (1) errors, (2) fraudulent financial reporting, (3) misappropriation of assets, or (4) violations of laws or governmental regulations that are attributable to the City or to acts by management or employees acting on behalf of the City. QUALITATIVE ASPECTS OF ACCOUNTING PRACTICES Management is responsible for the selection and use of appropriate accounting policies. The significant accounting policies used by the City are described in the notes to financial statements. No new accounting policies were adopted and the application of existing policies was not changed during the year ended December 31, We noted no transactions entered into by the City during the year for which there is a lack of authoritative guidance or consensus. All significant transactions have been recognized in the proper period. 5

8 Required Communication QUALITATIVE ASPECTS OF ACCOUNTING PRACTICES (CONTINUED) Accounting estimates are an integral part of the financial statements prepared by management and are based on management's knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly from those expected. The most sensitive estimates affecting the financial statements were: Depreciation The City is currently depreciating its capital assets over their estimated useful lives, as determined by management, using the straight-line method. Net Pension Liability, Deferred Outflows of Resources Related to Pensions and Deferred Inflows of Resources Related to Pensions These balances are based on an allocation by the pension plans using estimates based on contributions. We evaluated the key factors and assumptions used to develop the accounting estimates in determining that they are reasonable in relation to the financial statements taken as a whole. The financial statement disclosures are neutral, consistent, and clear. DIFFICULTIES ENCOUNTERED IN PERFORMING THE AUDIT We encountered no significant difficulties in dealing with management in performing and completing our audit. CORRECTED AND UNCORRECTED MISSTATEMENTS Professional standards require us to accumulate all known and likely misstatements identified during the audit, other than those that are clearly trivial, and communicate them to the appropriate level of management. Management has corrected all such misstatements. In addition, none of the misstatements detected as a result of audit procedures and corrected by management were material, either individually or in the aggregate, to the financial statements taken as a whole. DISAGREEMENTS WITH MANAGEMENT For purposes of this letter, a disagreement with management is a financial accounting, reporting, or auditing matter, whether or not resolved to our satisfaction, that could be significant to the financial statements or the auditor's report. We are pleased to report that no such disagreements arose during the course of our audit. 6

9 Required Communication MANAGEMENT REPRESENTATIONS We requested certain representations from management that are included in the management representation letter. MANAGEMENT CONSULTATIONS WITH OTHER INDEPENDENT ACCOUNTANTS In some cases, management may decide to consult with other accountants about auditing and accounting matters, similar to obtaining a "second opinion" on certain situations. If a consultation involves application of an accounting principle to the City's financial statements or a determination of the type of auditor's opinion that may be expressed on those statements, our professional standards require the consulting accountant to check with us to determine that the consultant has all the relevant facts. To our knowledge, there were no such consultations with other accountants. OTHER AUDIT FINDINGS OR ISSUES We generally discuss a variety of matters, including the application of accounting principles and auditing standards, with management each year prior to retention as the City's auditors. However, these discussions occurred in the normal course of our professional relationship and our responses were not a condition to our retention. 7

10 The following pages provide graphic representation of select data pertaining to the financial position and operations of the City for the past five years. Our analysis of each graph is presented to provide a basis of discussion of past performance and how implementing certain changes may enhance future performance. GENERAL FUND BALANCE At December 31, 2016, the General Fund balance was $1,747,759 which is an increase of $157,841 from Based on current expenditure levels, the fund balance represents over 11 months of expenditures. $1,800,000 General Fund Balance $1,600,000 $1,676,621 $1,400,000 $1,200,000 $1,275,982 $1,326,645 $1,334,716 $1,504,383 $1,000,000 $800,000 $600,000 $400,000 $200,000 $- $67,068 $70,602 $89,222 $85,535 $71, Nonspendable Unassigned 8

11 GENERAL FUND $2,000,000 General Fund $1,800,000 $1,600,000 $1,400,000 $1,616,967 $1,609,492 $1,662,381 $1,666,184 $1,761,406 $1,752,715 $1,911,906 $1,723,926 $1,965,247 $1,785,406 $1,200,000 $1,000,000 $800,000 $600,000 $400,000 $200,000 $ Total Revenues Total Expenditures General Fund revenues increased by $53,341, or 2.8%, in Expenditures in the General Fund increased by $61,480, or 3.6%, and resulted in total revenues exceeding expenditures by $179,841. Further detailed explanations regarding variances will follow in subsequent charts. 9

12 GENERAL FUND REVENUES $2,000,000 General Fund Revenues $1,800,000 $1,600,000 $1,400,000 $1,200,000 $1,000,000 $800,000 $600,000 $400,000 $200,000 $1,616,967 $1,662,381 $1,761,406 $1,911,906 $1,965,247 $ Miscellaneous $42,792 $27,085 $27,019 $30,672 $42,613 Fines and Forfeitures 64,121 68,208 67,638 80,415 73,901 Charges for Services 72,676 61,779 64,584 66,092 58,240 Intergovernmental Revenue 411, , , , ,178 Licenses and Permits 75,629 75,077 68,253 80,864 73,339 General Property Taxes 950,306 1,003, ,501 1,003,065 1,056,976 Property taxes increased $53,911, or 5.4%, from 2015 due to an increase in the total amount levied in the Fund in The other remaining General Fund revenues in 2016 stayed relatively consistent with the prior year. 10

13 GENERAL FUND REVENUES (CONTINUED) The following graph shows the actual General Fund revenues and the corresponding budgeted amounts. $1,200, General Fund Revenues Budget and Actual $1,000,000 $800,000 $600,000 $400,000 $200,000 $- General Property Licenses and Intergovernmental Charges for Fines and Taxes Permits Revenue Services Forfeitures Miscellaneous Budget $1,046,183 $64,100 $664,324 $54,785 $73,000 $20,900 Actual 1,056,976 73, ,178 58,240 73,901 42,613 Overall, General Fund revenues were on budget, ending up with only a 2.2% variance, or $41,955 over what was budgeted. The main reason for this variance was due to the City budgeting conservatively on licenses and permits and miscellaneous revenues as those numbers can vary significantly from year to year. All other categories were only slightly under or over budget. 11

14 GENERAL FUND REVENUES (CONTINUED) The following charts depict the components of the General Fund revenues by percentages. General Fund Revenues 2016 Fines and Forfeitures 4% Miscellaneous 2% Charges for Services 3% General Property Taxes 54% ` Intergovernmental Revenue 33% Licenses and Permits 4% General Fund Revenues 2015 Fines and Forfeitures 4% Miscellaneous 2% Charges for Services 3% General Property Taxes 53% Intergovernmental Revenue 34% Licenses and Permits 4% General Fund sources of revenue remained consistent in 2016 compared to

15 GENERAL FUND EXPENDITURES $1,800,000 General Fund Expenditures $1,600,000 $1,400,000 $1,200,000 $1,000,000 $800,000 $600,000 $400,000 $200,000 $1,609,492 $1,666,184 $1,752,715 $1,723,926 $1,785,406 $ Parks and Recreation $79,213 $90,761 $93,672 $65,571 $73,223 Public Works 177, , , , ,515 Public Safety 816, , , , ,318 General Government 535, , , , ,350 In 2016, expenditures increased $61,480, or 3.6%, from Public Safety expenditures saw the largest increase from prior year expenditures. This was primarily due to an increase in police service costs in General government increased $13,924 or 2.4% due to an increase in wages for the year as the City had all positions filled for the entire year in Public Works decreased $13,095 or 6.7% due to a mild winter and less fuel and snow removal costs in

16 GENERAL FUND EXPENDITURES (CONTINUED) $1,000, General Fund Expenditures Budget and Actual $900,000 $800,000 $700,000 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $- General Government Public Safety Public Works Parks and Recreation Budget $640,150 $946,750 $221,090 $93,302 Actual 591, , ,515 73,223 Overall, expenditures came in under budget by $115,886 in All functions were under budget. General government was under budget $48,800, primarily due to budgeting for a full-time employee all year and that employee only being full-time for seven months of 2016, as well as budgeting for more attorney fees than spent in Public works was $38,575 under budget as there were less fuel and snow removal costs in 2016 due to a mild winter. Parks and recreation was $20,079 under budget due to budgeting for seasonal rink attendant wages that worked less than anticipated as well as lower fuel costs due to a mild winter in Public safety was under budget by $8,432 in 2016, due to conservative budgeting. The charts on the next page illustrate the allocation of General Fund expenditures by program/function. The allocation of total expenditures by program has been very stable over the last two years, which is an indication of sound budgeting/planning practices which allows the City to avoid major fluctuations or swings in spending levels among programs. 14

17 GENERAL FUND EXPENDITURES (CONTINUED) General Fund Expenditures 2016 Public Works 10% Parks and Recreation 4% General Government 33% Public Safety 53% General Fund Expenditures 2015 Public Works 11% Parks and Recreation 4% General Government 34% Public Safety 51% 15

18 SANITARY SEWER FUND The graphs below and on the next page illustrate the current operations of the Sanitary Sewer and the Storm Drainage Funds. $900,000 Sanitary Sewer Fund $800,000 $700,000 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $ Sewer Charges $788,551 $807,031 $780,844 $756,539 $829,339 Total Operating Expenses 565, , , , ,415 Depreciation 7,619 7,619 8,084 10,296 11,958 Operating Income with Depreciation 223, , , ,671 68,924 Operating Income without Depreciation 231, , , ,967 80,882 The Sanitary Sewer Fund realized operating income of $68,924 during Sewer charges in 2016 increased by $72,800 from 2015 due to an increase in sewer rates. Expenses in the fund also increased, going from $613,868 in 2015, to $760,415 in This increase was due to a large televising project in 2016 as well as an increase in wages. With operating income of $68,924, $12,258 in nonoperating revenue, and $40,000 in transfers out of the fund, the change in the Sanitary Sewer Fund net position was an increase of $41,182. Total net position increased to $2,514,909 in

19 STORM DRAINAGE FUND Storm Drainage Fund $160,000 $140,000 $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $ Storm Drainage Charges $141,630 $156,632 $155,116 $154,984 $157,067 Total Operating Expenses 139, , , , ,303 Depreciation 38,206 38,206 37,245 33,334 35,229 Operating Income (Loss) with Depreciation 1,864 19,970 38,915 18,433 34,764 Operating Income (Loss) without Depreciation 40,070 58,176 76,160 51,767 69,993 Storm sewer charges for services stayed consistent with the prior year, increasing only $2,083. Operating expenses, however, decreased $14,248, going from $136,551 in 2015, to $122,203 in This decrease in expenses was due to a decrease in maintenance costs in The Storm Drainage Fund had operating income of $34,764 in With $2,042 in investment income and $245 in miscellaneous income, the Storm Drainage Fund had a total increase in net position of $37,051. Ending net position at December 31, 2016, was $1,497,